What is Quality?

Quality /kwŏl′ĭ-tē/ noun

Profit measured over an eternal time horizon and considering all externalities
The maximization of human prosperity.

Quality is equal to the integral of profit, measured from zero to infinity.

Quality is cumulative over time.

This is due to Quality’s relationship with capital creation, as capital is created through Quality actions. Capital is the store of previously generated profit into the future. Capital creation, like Quality, is cumulative. After it is created, capital can only be consumed or destroyed through actions that decrease Quality.

As long as profit is positive, Quality will continue to increase.

For further illustration, let’s take a look at a few examples of profit curves (over discrete timeframes) that can occur within a business:

The Results of Quality Actions

Examples

Investing in better manufacturing practices to reduce yield loss.
Spending more on R&D for a few years until product quality is improved or new technology is developed.

NOTE: Not necessary to decrease profit before increase.

The Results of Non-Quality Actions

Examples

Performing layoffs prior to reporting quarterly earnings.
Cutting costs to appeal to new investors, acquiring companies, etc.

NOTE: Not necessary to increase profit before decrease.

Bonus Example: Start-up Company

A brief etymological note on the calculus terms integral and derivative.

The word integral means essential, vital, or fundamental. This formula implies that Quality is integral to profitability.

Quality is essential to profitability.
Quality is vital to profitability.
Quality is fundamental to profitability.

The word derivative means the byproduct of, the result of, or derived from. The formula implies that profit is a derivative of Quality.

Profit is a byproduct of Quality.
Profit is a result of Quality.
Profit is derived from Quality.

Opportunity Cost and Externalities

Opportunity cost is the abstract cost born from making one decision over another. For example, a company might decide to select one material over another for a critical component or they might decide to hire for one position and not another. When these decisions differ from the ideal Quality decision, there is an opportunity cost that can be thought of as the cost of non-Quality (CONQ). This cost is never included in a company’s income statement, and it is most commonly dismissed by decision-makers, however it can have a significant impact on the Quality of an organization. This opportunity cost, or CONQ, can be thought of as the actual profit generated minus the maximum amount of profit possible:

Typically, when externalities are discussed, they are referring to negative externalities associated with the environment, such as decrease in quality of life associated with pollution. Positive externalities, such as the increase in quality of life or the productivity improvements associated with the invention of a new technology, are much less commonly discussed. If Quality is measured using only a business’s internal profit, the additional prosperity associated with positive externalities gets ignored. For example, when the first car was invented, Ford didn’t consider the individual productivity gains of its customers in its profit margins, however since they add to the sum total of human prosperity, they should be considered when measuring Quality.

If every action taken and decision made is ideal, the maximum CONQ can be is zero. In the real world, it will always be negative. Since it is negative (or zero), it would have a positive relationship with internal profit. Also, since negative externalities would reduce Quality and positive externalities would increase Quality, this would also have a positive relationship with internal profit, giving us the following formula for actual (or real world) Quality: